Skippr Blog

Is your business a bank? The curse of long payment terms in Australia

How many banks are operating in Australia? You’re probably thinking there are at most 20 banks. You would be very wrong. There are actually thousands, possibly hundreds of thousandsof banks in Australia. ‘How is this so?’ I hear you ask. Well, every time your customer makes you wait for an invoice payment, you have effectively become a banker - presumably without the six-figure bonus or Ferrari.

Not only are you in the business of making loans when you sell goods and services to clients on a 30 day+ basis; you are making INTEREST FREE LOANS!! What your customer is actually saying is “how about you lend me some money with no interest?” It gets worse.

In some cases, your customer will offer you a discount for “early” payment. Sometimes this ‘early’ payment is 30 days after the customer receives invoice, instead of the agreed 60 days. What this actually means is that you are paying their interest bill on the money you lent them! Is your head spinning yet?

There are a number of reasons why this situation is bad for your business. It makes cash flow management much harder, creates hidden costs (chasing payments, loss of sleep over cash flow worries), and most importantly it negatively impacts your business valuation. It’s the sad reality of doing business in Australia.

Is this going to stop? Unfortunately it’s not going to stop anytime soon. Some sectors in the Australian economy are dominated by outright duopolies. No amount of clever negotiating is going to make them pay sooner unless you are willing to take a hit on the payment amount, which can very expensive.

What about government intervention? Good luck with that! This is a free market economy and besides certain companies have become “too big to pay on time”. If we look at the top 50 stocks in the ASX, you will notice that many of these businesses have strong free cash flow. Strong free cash flow, driven in large part by extended accounts payables, underpins dividend payments and market valuations. These companies are largely owned by institutional investors who invest in these companies because of their free cash flow and dividends. They cannot simply start paying their suppliers sooner because it’s the right thing to do for their suppliers. Management would be crucified by investors. Regulatory refrom has been getting some air time courtesy of Kate Carnell who is the Small Business Ombudsman but lets be realistic here, big corporates have a lot of power in our heavily oligpoplised economy!

Don’t throw in the towel just yet though, there is hope! There 3 ways effective ways to improve your cash flow. We like to call these your cash flow levers.

Lever 1 - Invoice Collection Strategies

Collection strategies can now be largely automated with great apps likeDebtorDaddy,ezyCollect, InvoiceSherpaandChaser. This will help make sure you invoices don’t go past their due date. However this still doesn’t solve the long payment terms problem.

Lever 2 - Invoice Finance

Invoice finance (also known as cash flow finance) is one of the most effective ways to reduce those payment terms. By selectively funding invoices, businesses can eliminate the waiting period for invoices from some of their larger customers. For businesses that need funding without offering personal guarantees or property security, invoice finance is increasingly becoming an effective weapon against cash flow issues.

Lever 3 - Stretching Supplier Payment Terms

The final option is pushing out cash payments to your suppliers. Yes this lever is a little hyporitical but lets be honest, the big businesses started it! A good middle ground is to try and negotiate part payments with your suppliers. Give them a portion upfront and the rest later.

Overall the effectiveness of these levers is driven by good process and relationships. It is important that processes are in place to ensure projects operate and deliver on schedule but most importantly are paid on time. Your ability to negotiate is dependent on how strong your relationships are with all your stakeholders, internal and external to the business.

Your business may be a bank. Long payment terms may strain your cash flow. It is a systemic issue that is not going away. What are you going to do about it? The first step is to understand where your problems lie. Is it collection processes that are a bit lax? Are you just paying all suppliers upfront? Do you fear finance?

Need some help with it? Well the best person to help you is your trusted advisor. Your accountant, your bookkeeper or your VCFO. They know the dark arts of cash flow management and these problems are not new to them. They are on the front foot too! Many now are using productivity apps that automate or streamline these processes so the dire impacts of long payment terms don't have to hurt your business.

Patrick is finance specialist with 10 years experience in fixed income and equity finance. He has worked as a buy-side analyst and portfolio manager in Australia, Hong Kong and UK. Patrick now spends his time solving big problems for small businesses.